Now that autumn is in full swing and a new year is quickly approaching, it is important for companies to turn their attention to the strategies available to help reduce and defer their 2022 taxes. Being proactive in projecting what your company’s 2022 tax picture looks like, understanding what options are available to reduce or defer taxes, and assessing the impact of the decisions made in 2022 allows for informed decision making and impactful planning for 2023.
Bonus depreciation and Section 179 depreciation
Under the rules of bonus depreciation in 2022, a company can expense 100% of qualified property placed in service. Generally, qualified property includes depreciable assets with a recovery period of 20 years or less.such as computer equipment, machinery, and qualified leasehold improvements. The amount of bonus depreciation after 2022 will be reduced by 20% per year through 2026 and will completely phase out in 2027.
As a permanent part of the tax code, Section 179 depreciation is another option where a company can expense up to $1,080,000 in qualified assets subject to phase-out when total capital purchases exceed $2,700,000. Unlike bonus depreciation, Section 179 depreciation can neither create nor increase a loss for a company. Any amount of Section 179 depreciation that increases or creates a loss is disallowed and is carried forward to subsequent years when it can potentially be utilized. It is important to note that the provisions for bonus depreciation and Section 179 depreciation fall under federal laws and most state and local laws modify or reduce the amount of accelerated depreciation that can be claimed in the initial tax year the assets are placed in service.
State pass-through entity tax deductions
The Internal Revenue Service (IRS) has approved an allowable federal deduction for state pass-through entity taxes. This allows states to establish programs that accommodate the shifting of state income tax obligations from the individual to the entity. Companies should now consider making any necessary elections and payments to obtain a federal tax deduction on their 2022 returns for state pass-through entity taxes. As each state’s programs have their own nuances, careful consideration should be made, and consultation sought to eliminate any unintended consequences.
Research and development and empowerment zone tax credits
Depending on a company’s industry and where it operates, there are various federal tax credits available. One of the most widely used and significant credits is the research and development credit, whereby a company receives a federal tax credit for increasing its research and development expenditures related to the design, development or improvement of products, processes, techniques, formulas, or software. Another federal credit is the empowerment zone employment credit, whereby companies can generate a federal tax credit based on a percentage of wages paid in designated qualified empowerment zones which are distressed urban and rural areas that are in need of revitalization.
Prepayment of expenses and deferral of income
For companies who file their tax returns on a cash basis, there are some year-end strategies that can help to defer taxes. Prepaying 2023 expenses, such as rent and health insurance, in 2022 and deferring revenue into 2023 is one commonly used strategy.
For companies that file their taxes on an accrual basis there could be an opportunity to make an accounting change to go from accrual to cash basis reporting, allowing for greater flexibility at year-end. If eligible to do so, the election to change from accrual to cash basis tax reporting can be made up to the extended due date of the return. Companies are generally eligible to file their tax returns on a cash basis if they are either a qualified personal service corporation or have average gross receipts less than $26 million and don’t have activities surrounding the production, purchase or selling of inventory. As an added benefit of making the change, a company can recognize any positive tax benefit in the year of change and any negative tax detriment ratably over a four-year period. The approval of this elected change is automatic, assuming the company is eligible. Companies that are in industries where their cash flow generally have low receivables and high payables will typically benefit from using cash basis for their tax reporting.
Establishment of a retirement plan
If a company does not have an existing qualified retirement plan, they might consider establishing one before 2023. In doing so, the company will get the benefit of making a tax-deductible contribution, which can be made up to the due date or extended due date of their return. In addition, there is a potential for small employers to receive tax credits for the plan’s start-up costs and the non-tax benefit of using the plan to attract and retain employees. Startup costs include set up, administration of the plan, and costs associated with educating employees about the benefits. Plan startup credits are subject to certain qualifications, but a company could qualify up to 50% of the plan’s startup costs up to a maximum federal credit of $5,000 for three years, for a maximum credit of $15,000.
How Citrin Cooperman Can Help
As tax laws are continuously changing, it is critical to be well informed and thoroughly prepared before the beginning of each new year. Citrin Cooperman’s professionals are here to help guide you through changing tax laws so that you can focus on what counts. If you have any questions on the opportunities presented in this article or would like further information about tax planning strategies, please reach out to Jeff Stuart at firstname.lastname@example.org.
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